Spring Forward with Mission Critical Assets

In the realm of commercial real estate, certain properties hold a significance beyond their physical structures. Properties vital to a tenant or owner's core business operations are often referred to as mission critical assets. The critical nature of these buildings can be attributed to various factors such as their unique construction, specialized contents, or strategic locations.

Defining Mission Critical Assets

In specific industries, businesses require buildings with highly specialized designs, tailored to their exact operational requirements. Once a company constructs and occupies these properties, they can be considered mission critical, as the costs and time associated with relocating are high. This is especially relevant with the ongoing rise in construction costs, where moving would require an entirely new and highly specific build-to-suit property.

Another factor contributing to mission critical assets involves heavy machinery, essential to manufacturing operations. When substantial investments are made in installing and maintaining machinery crucial to a business, it becomes difficult for these users to relocate, rendering the asset mission critical. Moving or replacing such equipment at a different location would result in excessive expenses, making relocation generally a low priority for the company.

Additionally, a property may be classified as mission critical due to its precise location. Some businesses opt to own or lease buildings in areas specific to their operations. These locations can be critical due to a multitude of factors, such as power capabilities, access to rail lines or waterfronts, street frontage on particular roads, local climate, availability of communications infrastructure, tax incentives, local employment base, proximity to other facilities within their network, lot size, and more. While many of these factors individually might not deem a property as mission critical, their combination can create significant challenges for a company contemplating relocation.

A prime example of an asset class often regarded as mission critical is data centers. The infrastructure required to operate a data center is costly. With substantial demands for power, fiber-optic connectivity, and climate and tax considerations, suitable sites for data centers are exceedingly limited. Once a company selects a site, considerable capital and time investment are needed to establish operations. The building and equipment requirements for these facilities far surpass others, leading to average construction costs nearly tenfold that of a traditional industrial building.

Significance in Single Tenant Leasing

In the single tenant, long-term lease sector, mission critical assets hold immense value. The critical nature of these assets boosts the likelihood of tenants remaining in place, leading to longer leases and more reliable re-signing when leases expire. The costs associated with equipment and relocation discussed above serve as deterrents for tenants. Further, the mission critical nature of these sites could prompt expansion efforts centered around them, further solidifying their essential nature in the user’s business operations. For this reason, mission critical locations can add 100 to 150 basis points to a property's value with a credit tenant in place.

Mitigating Risks and Ensuring Stability

It is essential to acknowledge that mission critical assets can pose risks for owners, particularly concerning the potential higher costs associated with re-tenanting the space if a tenant were to vacate. For instance, if a space is built to serve a company's specific function, additional costs may be incurred by the owner to convert it to a shell or functional state desirable for new tenants. For property owners and buyers, these risks emphasize the importance of selecting tenants with robust financial standing. Ensuring that the tenant operates a business with longevity is crucial when considering these types of properties.

Legacy West Partners’ Role

Legacy West Partners’ Kentucky portfolio consists of two mission critical manufacturing and distribution sites for our tenant, Precision Metal Works (PMW). These sites not only house the essential metal presses crucial to PMW's business but are also two out of only three manufacturing sites operated by the company. Additionally, the Louisville facility handles 100% of the company's parts painting, finishing, and packaging. These facts, coupled with our team's expertise and experience, facilitated the establishment of a 20-year absolute net lease upon acquisition.

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